LGI Homes, Inc. — Q3 2020 Form 10-Q
Quarter ended September 30, 2020; financial statements are unaudited. LGI Homes develops, builds and sells homes across five reportable U.S. regions, primarily to entry-level buyers, and also sells move-up homes under the Terrata brand.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Home sales revenue | $534.2m | $483.1m | $1,470.5m | $1,232.5m |
| Home closings | 2,091 | 2,003 | 5,931 | 5,175 |
| Average selling price per closing | $255,477 | $241,179 | $247,940 | $238,165 |
| Gross margin | 25.3% | 24.1% | 24.5% | 23.9% |
| Operating income | $77.4m | $64.0m | $199.2m | $143.5m |
| Income before taxes | $77.8m | $64.7m | $201.3m | $147.0m |
| Net income | $89.0m | $49.3m | $187.5m | $113.7m |
| Diluted EPS | $3.52 | $1.93 | $7.40 | $4.49 |
| Adjusted diluted EPS (non-GAAP) | $2.45 | $1.93 | $6.35 | $4.49 |
- Revenue increased 10.6% in Q3 and 19.3% year to date; closings rose 4.4% and 14.6%, respectively. Management attributed growth to higher average selling prices, additional communities—especially in the Southeast and Florida—and strong demand.
- Q3 gross margin expanded 1.2 percentage points; year-to-date gross margin rose 0.6 points. Management cited pricing and product mix, operating leverage, lower capitalized interest and overhead, partly offset by higher lot costs.
- Q3 net income included an $11.2m income tax benefit, versus a $15.4m provision a year earlier. Federal energy-efficient home tax credits totaled $29.4m for Q3, including $27.1m related to prior open tax years and earlier 2020 closings. Nine-month credits were $32.9m, including $26.6m related to prior years. These credits materially boosted reported earnings; adjusted diluted EPS excluding the credits was $2.45 for Q3 and $6.35 year to date.
- Nine-month operating cash flow was $113.0m, compared with cash used of $104.2m in 2019. Cash and equivalents were $46.3m at quarter-end, up from $38.3m at year-end 2019. Inventory increased $48.8m year to date; real estate inventory totaled $1,548.5m.
- Notes payable totaled $618.7m: $322.2m under the revolving credit agreement and $296.5m of 6.875% senior notes due 2026. The $650m revolver had $306.5m available under its borrowing base, after $627.6m of borrowings including senior notes and $15.3m of letters of credit. The company reported covenant compliance. Its minimum required liquidity covenant was $50m.
- Backlog at September 30 was 3,580 homes valued at $932.7m, versus 1,635 homes and $410.5m a year earlier. Nine-month net orders were 8,278 versus 6,186; cancellation rate was 20.6% versus 20.0%.
Management outlook, risks and notable items
- Management said sales demand had rebounded from the March–April slowdown, citing low mortgage rates, interest in single-family homes and limited supply of existing homes. It expected COVID-19 to continue affecting future results but provided no quantified earnings or revenue guidance.
- Management believed available cash, operating cash flow and revolver capacity or capital-market access would fund current and foreseeable liquidity needs for at least 12 months, while cautioning that pandemic-related uncertainty could constrain financing access.
- COVID-19 temporarily halted construction in some markets in March; construction resumed in April. The company reduced starts, land acquisitions and marketing spending to preserve cash, then resumed land purchases and increased starts and marketing from May. Further restrictions, weaker consumer confidence, mortgage-financing constraints, cancellations, labor or supplier disruptions, and inventory or land-option impairments were identified as risks.
- Management reported significant lumber cost increases during Q3 due to constrained supply and warned of possible further cost pressure. Inflation in land, labor, materials and financing, as well as interest-rate sensitivity, could affect affordability, margins and demand.
- After quarter-end, the board expanded the share repurchase authorization by $300m, to $317.2m available. The company also paid a $1.5m one-time appreciation bonus to eligible frontline employees on October 16, 2020. The company had repurchased $31.3m of shares during the first nine months.
- The revolver’s 87% extended commitments mature May 31, 2023; the remaining 13% mature May 31, 2022. Its LIBOR floor is 0.70%; management noted LIBOR’s planned phaseout and was evaluating the replacement-rate impact.
Important facts for investors to verify
- How much of the earnings and EPS increase reflects recurring homebuilding performance versus the federal tax credits, including retroactive credits.
- Whether demand, backlog conversion and cancellation rates remain strong, and whether production can keep pace with orders.
- Whether lumber, lot and other construction-cost increases pressure gross margins.
- Liquidity relative to the $50m covenant minimum, available borrowing capacity, and the obligations associated with $663.2m of land purchase contracts for 24,557 lots.
- How the expanded repurchase authorization is used alongside land investment and debt management, and how the LIBOR transition affects variable-rate borrowing costs.